Japanese Bonds: Yield of Dreams?

Why Japan's long-battered bond market may be gearing up for a comeback

Saber-tooth tiger. Wooly mammoth. Japanese government issued bonds?

Well it's happened. After years of enduring an unrelenting bear market (marked
by plunging yields and rising prices) -- the long-battered Japanese government
bond has made it on to the endangered financial species list.

Asks one October 26 Reuters: "JGB's on the edge of extinction?"

The prognosis isn't looking good. In late October, the yield on the 10-year
JGB plunged below .300% for the first time in six months. While everyone from
Japanese retailers to foreign investors continue to abandon the JGB for other
higher-yielding assets.

Well, according to the mainstream financial experts, the ultimate poacher
of the JGB is the Bank of Japan itself. Huh?

Okay, here's where things get a bit complicated. And if you happen to need
a cure for insomnia, by all means, pick up a book on the Bank of Japan's monetary
policy changes and its impact on the value of long-dated securities.

But for the sake of time and sanity, here's a much simpler explanation: The
introduction of quantitative easing (or QE) has brought about the collapse
in bond yields. Namely, the Bank of Japan's commitment to buy government bonds
by the fistful, all the while keeping interest rates at a historic 0%.

Even simpler: The BOJ buys bonds, their prices rise, and yields fall. (Because
prices and yields of all bonds move inversely to each other.)

Here the news headlines go:

"The belief that the BOJ will carry out monetary easing pushed long-term
yields below the .3% threshold." (Bloomberg)

"The yield on Japanese government bonds is almost nonexistent, due to the
Bank of Japan's aggressive yen printing." (Reuters)

"Amidst the Bank of Japan's easing, Japanese interest rates are unlikely
to rise. We have to look into diversifying our investments." (Reuters)

But there's one problem with this logic. If rate cuts and QE caused bond yields
to fall -- then why did bond yields also fall amidst rate hikes and
an absence of QE?

Here, we have a chart of the Bank of Japan's interest rate policy since 2006.
Notice: In July 2006, the BOJ ended its zero-rate policy (in place since
2001), and embarked on its most radical rate hike campaign since the late 1980s
-- until 2007.

During this time, however, the JGB yield turned down, not up -- as the conventional
logic would suggest -- as the next chart shows:

So, clearly Japan's bond market is not following the cues of its central bank.
But make no mistake, it is following a very clear pattern -- an Elliott wave
one, and more.

Here, our October 2015 Global Market Perspective's three-part Special
Report on Japan shows you how the 10-year Japanese Government Bond is not only
adhering to a 69-year long Kondratieff cycle -- but also, to the most common
Elliott wave pattern, a five-wave impulse which began in the 1960s.

Here is an excerpt from the Special Report:

"The monthly chart at right shows that yields remain within a trend channel
that has mostly contained wave 5 (circle) over the past nine years. The upper
line of the channel runs through the zero percent level in mid-2018. In theory,
yields could fall that low. However, the momentum of the decline has already
begun to register divergences-versus the 2003 and 2013 lows..."

"For those who follow Elliott wave analysis, the writing is on the wall:
The next move Japanese stocks, interest rates, and the economy appears to
be... in line with the Kondratieff Spring phase."

Remember the famous line from the movie Field of Dreams -- "If you build
it, they will come."

If the 10-year JGB yields continue to build toward a major bottom, as our
charts suggest -- then the opportunity of a lifetime will come for investors
on the right side.

Now for the best part: From now until November 18, the entire
3-part Special Report on Japan is available to our Club EWI members.

Robert Prechter, Chartered Market Technician, is the founder
and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer
the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist
monthly market letter since 1979.

Elliott Wave International (EWI) is the world's largest
market forecasting firm. EWI's 20-plus analysts provide around-the-clock forecasts
of every major market in the world via the internet and proprietary web systems
like Reuters and Bloomberg. EWI's educational services include conferences,
workshops, webinars, video tapes, special reports, books and one of the internet's
richest free content programs, Club EWI.